The Performance of Open-End International Mutual Funds

The 1990s witnessed tremendous growth in the assets of international mutual funds. This growth is likely to continue as more investors seek the diversification benefits of foreign assets, which have relatively low correlations with domestic stock portfolios. Investors may also be attracted to international funds in the popular belief that such funds can earn abnormally high returns because of the relative inefficiency of these markets. But there is little evidence that this notion is valid.

This article sets the stage for investigating whether exploitable foreign market inefficiencies exist by studying the performance of a large sample of international open-end mutual funds during the 1990s. The analysis sorts funds into thirty-two categories and then applies four commonly used performance measures to characterize the funds' return distributions.

The results show that a large percentage of well-diversified international funds outperform their passive benchmarks in a statistically significant manner, but regional and country funds do not. In addition, emerging markets funds exhibit volatilities that are generally higher than those of developed market funds but do not exhibit significantly higher average or abnormal returns.

These findings indicate that the attractiveness of emerging markets investment should be revisited in more detail. The author suggests that the next step is to formulate data tests that can disentangle competing models of international capital markets and thus identify the underlying factors driving the results.